Monday, April 27, 2015

Chinese Chequers in Pakistan: Hyperbole, Hazards and some Heft for The Economy

Sushant Sareen,

Senior Fellow, VIF

Forty-six billion dollars. A figure like this not only makes for a great headline but also creates a hype which deflects from the fine print and details that lie behind this number. Not surprisingly, the focus of attention – in Pakistan, in India and in other parts of the world, including the US – is the big number and how it will be a ‘game-changer’, how it will change the destiny of Pakistan, how it will change the strategic balance in the region and so on and so forth. But start breaking down the number into its component parts, and the hyperbole surrounding China’s grand plans for Pakistan appear to be somewhat over the top. Equally important, the sort of alarm being sounded by some Indian analysts is also a trifle misplaced. While India must keep a hawk-eye on the China-Pakistan nexus, it surely doesn’t behove India to have a knee-jerk reaction to every Sino-Pak collaboration.

The China-Pakistan Economic Corridor (CPEC) project is going to come up over the next 15 years. This means that the $46 billion is not going to be dumped in Pakistan in the next few months but will be spread over more than a decade. There are a few ‘early harvest’ projects – about $ 28 billion worth – that will come up in the next 3-5 years. Most of these are in the power sector (about $ 22 billion). The rest ($ 6 billion) are infrastructure projects which include building the Gwadar port and expanding the existing road networks. While the Karakorum Highway is to be extended and broadened, there is as yet no firm plan to either build a railway line through the Gilgit-Baltistan area of Pakistan-occupied Kashmir (PoK) or an oil and gas pipeline linking Gwadar to Kashgar in Xinjiang province of China. These projects may eventually come up but as of now they haven’t moved beyond the drawing board stage. The rest of the $ 17 billion will be spread over another ten years beyond 2020 and will once again include some power projects, roads networks and industrial townships and Special Economic Zones.

The plan to link up the restive provinces of Khyber Pakhtunkhwa and Balochistan with the CPEC is going to happen in the second stage, if at all. There are also plans to extend the CPEC to Afghanistan. But this will depend in large part on how the political and security situation develops in that country. Come to think of it, a lot of the CPEC will also depend on how the security situation develops inside Pakistan, and if things don’t look up, a lot of the investment will simply not come.

To be sure, even if half of the investment and projects that are envisaged under the CPEC come up, it will provide a fillip to the anaemic Pakistan economy. Assets will be created, as will jobs. Business and economic activity will also get a kick-start. So far so good. But this will all come at a cost, which one daresay, may not have been calculated or factored in by the Pakistani side. Whether this is because of their desperation to get things moving any which way, or it is because of their exuberance, excitement and even their servility towards the Chinese, or it is because of the Pakistani inability to think things through before taking the plunge, is a matter of debate. Suffice to say, there are serious economic implications of these projects. It is of course entirely possible that ultimately the Chinese write off their investments in Pakistan as a gift to their ‘Iron Brother’ and instead of the economic dividends that will flow China’s way through its investments in the CPEC, China remains satisfied with the political and strategic dividends that it expects from the project. If this happens, then it would fit into a pattern set by Pakistan's benefactors before China.

For now, however, the Chinese are demanding and getting their pound of flesh.The rate of return on the power projects they are setting up is anything between 24-37 per cent. What is more, the Chinese projects will get their payment before any other power producer gets it. This is because the Chinese are extremely wary of the horrendous ‘circular debt’ crisis that has brought the Pakistan power sector to near financial collapse. Many of the projects that will be set up are coal based projects. These are being shut down in China because of the environmental havoc they have caused. For the Chinese, shifting these power plants to Pakistan is a win-win. They dump their obsolete and polluting technology on Pakistan and make top dollar in the process. Although the Pakistan electricity regulator has declared an upfront tariff for different kinds of power plants, what the final tariff will be remains unknown for now. The apprehension expressed by some Pakistani economic analysts is that the entry of the Chinese might end up worsening the financial crisis of the power sector instead of solving the energy crisis that has crippled industry and homes for many years now. There is also the whole issue of building supply chains for the coal-based power projects and the cost this will entail, not just in terms of infrastructure building but also in terms of imports and how this cost will be factored in the power prices.

What is also causing disquiet in some circles in Pakistan is the fact that the Chinese projects have not come in through any competitive bidding process but as part of what cynics call ‘sweet-heart’ deals. Despite the fact that many Chinese investors are public sector companies, they are not at all squeamish about buying and bribing their way into countries like Pakistan, which for political and strategic reasons find it difficult to say no to the Chinese.

Apart from the Chinese, the Turks and the Qataris have also been taking advantage to seal some sweet-heart deals with Pakistan. In many of these cases – Chinese locomotives, Turkish electricity ships and Qatari LNG and road projects – Pakistan has ended up either with junk or paying a very heavy price (Rs 42 a unit for buying electricity from the Turkish power ship before it was scrapped by the Pakistan Supreme Court). There are fears that something similar may happen with the power and infrastructure projects that will be set up under the aegis of CPEC.

Questions have also been raised over both the funding of the projects (investments and repayments) as well as the Chinese model of investment under which practically everything – labour, machinery, equipment, raw material and what have you – is brought from China and very little is sourced from the local market. This could well mean that there will be little economic spin-off of these projects and Pakistan could end up with white elephants for which its people will be made to pay through their noses for the rest of their and their children’s lives.

While the economics of the projects is quite iffy, the strategic assumptions and dimensions underpinning CPEC are also not as awe-inspiring as is being made out by both the detractors as well as backers of this project. Given the topography of the area through which corridor is going to pass, it is unlikely to become a replacement for the sea traffic going to and from China through the Straits of Malacca. This is so even if a railway line was to be built through the Karakorum range going into Xinjiang. While the Corridor will provide a closer sea access to Western China – Xinjiang and to an extent Tibet – it will be quite a stretch to imagine that it will also provide an alternative route to the Eastern Seaboard of China to access the Arabian sea and beyond. The Corridor also doesn’t need Afghanistan to access Central Asia or even Iran, the former can be accessed through links already established and the latter can be accessed through Pakistan. Afghanistan is important only to the extent that the Chinese can transport raw material out of that country, which is also contingent on whether Afghanistan indeed has the sort of mineral wealth that is often cited and on Afghanistan not descending into chaos and anarchy in the next few months and years. The Balochistan and Khyber Pakhtunkhwa legs of the Corridor are also not going to come up because once the Sindh-Punjab route is settled, no one will sink money into building another route through these two restive provinces.

In the end, the Corridor is primarily about China getting a solid base in Gwadar and getting a land access to this port from its Western borderlands. All the other projects are just embellishmentsthat ostensibly sweeten the deal for the Pakistanis, partly through creation of assets and partly through under-the-table deals that will further enrich theruling classes of that country. A lot will of course depend on how the security and political situation develops inside Pakistan. But as long as the Chinese have a secured Gwadar, they will have got what they want out of this deal, especially since they will have tied Pakistan into a neo-colonial arrangement in which it will become a virtual colony and a captive market for Chinese goods. Although the Pakistanis are happy being the recipient of Chinese largesse – aptly summed by the acronym of the new China-Pakistan think-tank titled ‘RANDI’ or Research and Development International – because the Chinese have desisted from interfering in Pakistan's political affairs (unlike the overbearing Americans), this too could start changing with the rising Chinese involvement and investment in Pakistan.

Over the last few years, Pakistan has had to initiate major operations against their own jihadist proxies on Chinese demands – first in the Lal Masjid operation and later in Operation Zarb-e-Azb. This could become a precursor of things to come.

From the Chinese point of view, there are two additional factors that they need to take into account. The first is Pakistan's track record of double-dealing with their benefactors, something that the Americans and now the Saudis are finding out to their cost. The second is the civilizational disconnect between China and an increasingly Islamised Pakistan.

Although the Pakistanis have downplayed the heavy-handed crackdown by China against Muslims in Xinjiang, the jihadists in Pakistan as well as the international jihadists narrative has started portraying China as a Dar-ul-Harb, or land of war. This could in future become a major flashpoint between China and Pakistan and could become the trigger for the latter double-dealing the former. An additional factor is also that the Chinese people don’t have a very high opinion about their ‘Iron Brother’. The Pew Survey claims that only 30 per cent of the Chinese have a positive image of Pakistan, equal to the number who have a positive image of India!

As far as India is concerned, the most objectionable part of the CPEC is that it traverses through PoK. The increasing Chinese involvement and presence in that region is going to effect a material change in the status of this part of India which is under Pakistan's illegal occupation. Other than this, there isn’t much reason for India to be overly concerned. The CPEC is not about encircling India, at least that doesn’t appear to be the primary purpose at this point in time. Interestingly, even though the Pakistanis are crowing about CPEC, they are also trying to sell this project to the world by saying that it will bind together 3 billion people of the region. Given that there are 1.4 billion Chinese, .2 billion Pakistanis and throw in the Afghans, Iranians and Central Asians (about another 100-150 million), the figure of 3 billion has to include India. Ironically, while Pakistan implicitly includes India in the CPEC, it explicitly excludes India by denying transit rights and routes and refuses to enter into a normal trading arrangement under WTO rules.

Be that as it may, the CPEC is more about China’s expanding role and influence in the region that it considers its backyard and falling within its sphere of influence. It is also about finding new, practically captive markets for its industry which is already showing signs of slowdown. The way the Chinese see it, by going in for the CPEC, they will help in stabilising Pakistan and thereby limiting the regional destabilisation that a failing Pakistan will cause. At the same time, they will make some money in the process and also increase their strategic footprint. To the extent that China’s expanding footprint spooks, even riles, India, it will be an issue in Sino-Indo relations. But if India plays it well, it can turn this Chinese footprint into an advantage, much like it did with the US. It is another matter that the US hasn’t been very effective as a partner in altering Pakistan's rank bad behaviour. But if the Americans could do anything to Pakistan in their own cause, it is pointless to expect them to deliver anything in India’s cause against Pakistan. This may not be the trajectory if India can get China right. Thus, while Prime Minister Narendra Modi must protest the use of PoK territory for the CPEC, he must have a plan in place to win over China for a mutually beneficial economic and strategic partnership. That will give India another pressure point against Pakistan.